"Cut your losses and let your profits run." (Daniel Drew, 1800)
The concept is sound. In fact, it is one of the most important understandings an investor can have about the stock market.
It is prudent for an investor to sell stocks that are losing money, stocks that could continue to drop in price and value. It makes equally good sense to stay with stocks that show significant gains, as long as they remain fundamentally strong.
But just what is a loser?
- Is it any price drop from the high?
- Is a stock a loser ony if the investor is actually in a loss position - that is, when the current price is below the original purchase price?
Any price drop is a losing situation. Price drops cost the investor money. They are a loss of profits. In some circumstances, the investor should sell, but in other situations the investor should take a closer look before reaching a sell decision.
The determination of whether a stock is still a winner depends on the cause of the price correction. If a price drop occurs because of a weakness in the overall market situatio or is the result of a "normal" daily fluctuation of the stock price, the stock can still be a winner.
If however, the cause of the drop has long-term implications, it could be time to take the loss and move on to another stock. Long-term implications could be any of the following:
- Declining sales
- Tax difficulties
- Legal problems
- An emerging bear market
- Higher interest rates
- Negative impacts on future earnings.
Any event that has a negative impact on the long-term picture of earnings or earnings growth can quickly turn a stock into a loser. Many long- and short-term investors will sell out their positions and move on to a potential winner.
No comments:
Post a Comment